Unit 1 Quiz (8-26-18)
An investment adviser who has custody of customer funds and securities discovers that her net worth has dropped below the required minimum under the rules of the state Administrator. Under NASAA rules, the adviser must: I. notify the Administrator by close of business after the day of discovery. II. file a report of its financial condition no later than close of business the day after notification. III. include in the report of financial condition a statement as to the number of client accounts. IV. cease doing business. A.)I, II and III. B)I, II, III and IV. C)I and IV. D)I only.
A. As a condition of the right to continue business, the adviser must notify the Administrator by close of business after the day of discovery. No later than close of business the day after notification, the adviser must file a report of its financial condition, which must include statements regarding the number of client accounts. Reference: 3.6.5.1 in the License Exam Manual
A publicly traded corporation offers its employees an opportunity to purchase shares of the company's common stock directly from the issuer. A specific employee of the company is designated to process any orders for that stock. Under the USA, the employee: A)must register as an agent only if he will receive commissions or remuneration, either directly or indirectly related to the volume of sales. B)need not register as an agent of the issuer under any circumstances. C)must register as an agent of the issuer. D)may receive commissions without registration.
A. Under the USA, an individual is an agent when effecting transactions with an issuer's existing employees if commissions or other remuneration related to the sale are paid. Therefore, there are cases where the employee would have to register as an agent. When the individual is paid a straight salary for this work, no registration is required. Reference: 2.3.2.2.1 in the License Exam Manual
Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser would have to disclose that the firm was acting in a principal capacity when: A)purchasing shares directly from advisory clients B)the trade is being executed by an officer or partner of the firm C)engaging in an agency cross transaction D)directing securities transactions to an affiliated broker-dealer
A.) There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from clients who own those shares places the IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In an agency cross transaction, the firm is acting as an agent—that's the reason for the term. Reference: 3.12.1 in the License Exam Manual
Which of the following statements regarding the brochure delivery requirements of the Investment Advisers Act of 1940 are TRUE? I. The brochure must be updated each time Part 1A of Form ADV is updated. II. The brochure delivery requirement does not apply to investment companies or clients who are serviced on an impersonal basis, such as with a newsletter, with an annual cost of less than $500. III. A brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. A)II and III. B)I and II. C)I and III. D)I, II and III.
A.) II and III Explanation Because the information in the brochure is derived from Part 2A of the Form ADV, changes to Part 1A will not necessarily apply to items that are important to the client. Therefore, stating that the brochure must be updated whenever there is a change to Part 1A would not be correct. SEC rules require that a brochure, or summary of material changes, if any, must be delivered to all clients within 120 days of the end of the adviser's fiscal year. If there are no material changes, a brochure does not have to be sent. The brochure delivery requirements do not apply to customers that are investment companies or for clients of impersonal services (those that do not purport to meet the investment objectives or needs of specific clients), as long as the cost of the service is less than $500 per year. Reference: 3.10.3.1 in the License Exam Manual
Which of the following are exempt from state registration? I. A common stock traded on the OTC Bulletin Board whose bonds are listed on the NYSE. II. An isolated nonissuer transaction. III. A transaction by an administrator of an estate IV. A transaction with no commissions directed by the offeror to no more than 50 persons in the state who buy the security for investment purposes only. A) II and III B) III and IV C) I and IV D) I and II
A.) II and III Isolated nonissuer transactions and transactions by an administrator are included in the list of exempt transactions. The private placement exemption is limited to a maximum of 10 offers to retail clients. If this were to institutions, (where there is no numerical limitation), commissions would be paid and immediate resale is permitted. If the common stock is federal covered (listed on the NYSE) and, therefore exempt from registration, then a senior security, such as the bond, would also be covered. But, it doesn't work in reverse. Reference: 2.8.2 in the License Exam Manual
Malcolm Munger CLU®, is an insurance agent catering to highly successful business executives. During a routine servicing call, one of those clients asks Malcolm if he knows anyone who is sharp enough to handle his $50 million investment portfolio. Malcolm refers the client to Superb Asset Managers Company (SAMCO), an investment adviser doing business in this state. The CEO of SAMCO meets with Malcolm's client and an advisory contract is signed. To show their appreciation, Malcolm receives a $500 finder's fee from Superb Asset Management Company (SAMCO). Under NASAA's Model Rule dealing with Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers: A)SAMCO must disclose the existence and circumstances of the finder's fee to the client. B)SAMCO must make sure that Malcolm discloses the fee to his client. C)the finders fee would be disallowed if the IA did not have an insurance license. D)no disclosure is necessary unless it will result in the IA's fee being higher than it would have been without the finder's fee.
A.) SAMCO must disclose the existence and circumstances of the finder's fee to the client. Finder's fees are permitted, but it is the obligation of the IA to make full disclosure to the client. Since nothing here indicates that Mr. Munger is registered, he does not have any responsibility under NASAA regulations to make disclosure to his client. There really is a lot more required here, but there are no alternative choices (and it may be like that on the exam). Reference: 3.16 in the License Exam Manual
All of the following statements regarding securities brokerage firms are true EXCEPT: A) they employ only registered investment adviser representatives. B) they may act as dealers who buy and sell securities for their own account. C) they are regulated by the SEC as well as individual stock exchanges. D) they act as agents in executing orders to buy and sell securities on the various stock exchanges in the secondary market.
A.) They employ only registered investment adviser representatives. Agents work for broker-dealers, while investment adviser representatives work for investment advisers. Reference: 2.3.3.1 in the License Exam Manual
An agent of a registered broker-dealer contacts a retail client about an exciting investment opportunity. He tells the client that he has a draft of the sales literature describing the issue, but he cannot send it out because it has not yet been approved by the Administrator. The client begs the agent to send the document anyway and, not wanting to disappoint a good client, the agent complies with the request. Once the issue is effective, the client makes a substantial purchase based on the information in the previously received sales piece. In this case, the agent has: A) Violated the provisions of the Uniform Securities Act B) Properly served the client C) Incurred possible criminal liability D) Accepted an offer of rescission from the client
A.) Violated the provisions of the Uniform Securities Act. In the case of a nonexempt security sold in a nonexempt transaction (when the agent contacts a retail client, the transaction cannot be exempt), sales literature must be filed with the Admininstrator. In many states, approval is required as well. If sales literature is used prior to approval, the agent is subject to potential civil (not criminal) liability. An offer of rescission is only made by the broker-dealer, never the client. Reference: 2.15.1 in the License Exam Manual
Under the Uniform Securities Act, the Administrator may require a broker-dealer to post a surety bond of: A) $50,000.00 B) An amount not in excess of that set by the SEC. C) $10,000.00 D) $25,000.00
B.) An amount not in excess of that set by the SEC. Unlike investment advisers where the USA specifies posting a surety bond in the amount of $35,000, the Uniform Securities Act does not specify an amount for broker-dealers. However, the NSMIA states that the Administrator may not require a broker-dealer be bonded in an amount above that set by the SEC. Furthermore, bonds will not be required of broker-dealers that maintain a specified net capital. Reference: 2.3.1.3 in the License Exam Manual
Your client maintains a small cash account at the firm. One typical broker-dealer fee that would not be charged to this client is A) an account maintenance charge B) margin interest on the debit balance C) the fee for transferring certificates D) a charge if the client asks to have funds wired
B.) Margin interest on the debit balance. In a cash account, you can't have margin activity, so there can't be a margin interest charge. Reference: 2.11.11.1.1 in the License Exam Manual
If a nonexempt company has authorized a stock split that will give each shareholder two shares for every one share owned without charge, this action: A) must be registered because it is the issuance of new nonexempt securities. B) need not be registered because it is neither an offer to sell or a sale. C) must have the prior written approval of each state Administrator in which the shares trade. D) need not be registered because the shares of the corporation have already been registered.
B.) Need not be registered because it is neither an offer to sell or a sale Shares issued as a result of a stock split need not be registered because the distribution of additional shares through a stock split or stock dividend is not within the definition of an offer to sell or a sale as long as no consideration (payment) is involved. Reference: 2.12.1.4 in the License Exam Manual
An individual has been employed by a broker-dealer to solicit new subscriptions for the firm's free monthly stock market report. The individual is paid a salary plus bonus based on his success rate with signing up subscribers. Under the USA, this person would: A) have to be registered as an agent of the broker-dealer. B) not have to be registered as an agent of the broker-dealer. C) only be allowed to contact existing clients of the broker-dealer. D) have to be registered as an investment adviser representative.
B.) Not have to be registered as an agent of the broker-dealer. Agents of broker-dealers are in the business of securities-related transactions on behalf of clients of the firm. A free market report is not a security, so this individual is not soliciting securities business. Reference: 2.3.2.1 in the License Exam Manual
In which of the following situations has the investment adviser NOT violated the antifraud provisions of the Investment Advisers Act of 1940? A)Ray's financial plan uses products available through a number of different broker-dealers. Ray intends to act as an agent of a broker-dealer with whom he is associated in implementing only a portion of the plan. He does not make this intention known. B)Jane is affiliated with a broker-dealer but doesn't tell clients that the investment advice she renders is outside the scope of her employment with that broker-dealer. C)Linda tells clients the time is right to convert shares of a money market fund to shares of a growth stock mutual fund in the same mutual fund family. Without telling clients, she makes a similar conversion for her own account. D)George intends to implement a financial plan using only products available through a broker-dealer with whom he is associated but does not make this intention known to the client.
C.) If advisers intend to implement a plan using only products available from a broker-dealer with which they are affiliated, this fact must be disclosed to clients. If advisers will act as an agent of a broker-dealer with which they are affiliated in implementing any part of a plan, this fact must be disclosed. If the investment advice provided is outside the scope of their employment with the broker-dealer with which they are affiliated, this fact must be disclosed. However, advisers are required to disclose trades made for their own account only if those trades are designed to profit from the market impact of recommendations or are inconsistent with their advice. In this case, the transaction made for the adviser's own account is consistent with her advice. Reference: 3.17 in the License Exam Manual
As defined in the Uniform Securities Act, which of the following is NOT a security? A)Common stock of ABC National Bank that is a member of the Federal Reserve System B)Interest in a merchandising marketing program C)Annuity providing a fixed monthly payout D)Options on a federal covered security
C.) Annuity providing a fixed monthly payout. Variable annuities are securities while fixed annuities are not. Options contracts, interests in merchandising marketing programs, and common stock are securities under the USA. The key to questions like this is to remember those things that are not securities. Reference: 2.5.1.1 in the License Exam Manual
Kapco Investment Advisers currently has $18 million in assets under management and has offices in Colorado and Utah. Kapco's only clients in Utah are two insurance companies domiciled in that state. Kapco has no office in Washington but does service the accounts of three middle-class individuals. Kapco has recently opened an advisory account for a pension plan for a corporation located in Montana. Under the Uniform Securities Act, Kapco would have to register with the Administrator in the state of: I. Colorado II. Montana III. Utah IV. Washington A)I and II. B)I and IV. C)I and III. D)III and IV.
C.) I and III Explanation: With less than $100 million in assets under management and no investment company clients, Kapco cannot qualify as a federal covered adviser. Therefore, the firm must register in each state in which it maintains an office, regardless of the nature of its clientele in that state. Registration would not be required in Washington because there is no office and Kapco qualifies for the de minimis exemption. Kapco would not be required to register in Montana because there is no office and its only client is an institution. Reference: 3.4 in the License Exam Manual
Fairweather Securities Corp. (FSC), a registered broker-dealer, has invited several IARs from Econometric Advisory Services (ESA), a registered invested adviser that directs transactional business to FSC, to a seminar featuring a disquisition on current economic trends being presented by a leading economist. It would be permitted for FSC to cover which of the following expenses? A) Registration fees for the seminar plus travel expenses B) Travel and transportation fees, but not the seminar fee C) Registration fees for the seminar D) None; because ESA directs commission business to FSC, it would be an unethical business practice for FSC to pay any portion of the expenses
C.) Registration fees for the seminar Payment for seminar fees is permitted under the safe harbor provisions in Section 28(e) of the Securities Exchange Act of 1934. Reference: 3.18 in the License Exam Manual
Alex Alexander is planning on registering as an agent for a broker-dealer. Which of the following would be the least likely requirement for a successful application? A) Taking and passing an examination B) Paying the filing fees C) Submitting fingerprints D) Filing an application for registration
C.) Submitting fingerprints Fingerprints are not a specific requirement of the Uniform Securities Act. Reference: 2.4.1 in the License Exam Manual
Which of the following is required to register as a broker-dealer? A)A bank. B)A savings and loan association. C)A trust company. D)A person who effects transactions for the accounts of others.
D A person buying and selling securities for customers' accounts is deemed a broker-dealer under the Uniform Securities Act and must be registered as such. Specifically excluded from the definition of a broker-dealer are banks, trust companies, and savings and loan associations. Reference: 2.3.1 in the License Exam Manual
Great Western Securities, Inc., (GWSI), a registered broker-dealer, is also the distributor for the Westcore Value Fund. When an agent registered with GWSI recommends the purchase of the Westcore Value Fund, A)the agent is committing an unethical business practice by recommending an affiliated entity B)the agent shall obtain the approval of a designated supervisor before making the recommendation C)the agent shall ensure that the fund's sales charge is fair and reasonable D)the agent shall disclose the potential conflict of interest to the client.
D Anytime a broker-dealer is also the distributor of a mutual fund, disclosure of the potential conflict of interest shall be made whenever that fund is recommended to the firm's clients. Agents have nothing to do with the sales charge levied by a mutual fund—that is stated in the fund's prospectus. Reference: 2.11.17 in the License Exam Manual
Under the Uniform Securities Act, a nonissuer transaction is: A)the issuance of mutual fund shares. B)an initial public offering of common or preferred stock. C)a Regulation D private placement sale of limited partnership interests. D)the purchase and sale of shares of common stock on the CHX.
D In a nonissuer transaction, the proceeds do not flow to the issuer; rather, the proceeds are credited to selling shareholders. A secondary market trade, such as a transaction executed on the floor of an exchange, is a nonissuer transaction. An IPO, the purchase of mutual fund shares, and the purchase of limited partnership interests all benefit the issuer and are called issuer transactions. Reference: 2.5.3.2 in the License Exam Manual
Which of the following statements regarding the USA are TRUE? I. State securities Administrators may deny, by rule or order, an exemption to an exempt transaction under the USA, if the security involved is not covered by federal exemption. II. State securities Administrators may not deny, by rule or order, an exemption to an exempt transaction under the USA, if the security involved is not covered by federal exemption. III. State securities Administrators may deny, by rule or order, an exemption to a federal covered security. IV. State securities Administrators may not deny, by rule or order, an exemption to a federal covered security. A) III and IV. B) II and III. C) II and IV. D) I and IV.
D.) I and IV State securities Administrators may deny, by rule or order, an exemption to an exempt transaction under the USA unless the security involved is covered by a federal exemption. State securities Administrators may not, however, deny an exemption provided to a federal covered security. Federal covered securities are granted exemption from state registration by federal law, so the state Administrator has no authority to deny the exemption granted by the federal government. Reference: 2.8.2.1 in the License Exam Manual
Under the Investment Company Act of 1940, an investment company may initially retain the services of an investment adviser only with approval of: A)the majority vote of the noninterested directors. B)the majority vote of the board of directors. C)the majority vote of the outstanding shares. D)the majority vote of the outstanding shares and a majority of that portion of the board of directors that are considered noninterested members.
D.) The majority vote of the outstanding shares and a majority of that portion of the board of directors that are considered non-interested members. The investment adviser's contract must be initially approved by a majority vote of the outstanding shares and a majority of the noninterested members of the board of directors. It is renewed annually by either a majority of the board or a majority of the outstanding shares. In addition, as with all contracts, initial and renewal, it requires a majority of the noninterested board members. Reference: 1.10.9 in the License Exam Manual
Which of the following statements regarding the handling of discretionary accounts are TRUE? Discretionary accounts must be reviewed frequently by the designated supervisory person. An investment adviser representative may decide, without discretionary authority, the security to buy or sell and the amount to buy or sell. A husband or wife may at any time exercise discretionary authority in the spouse's account without specific written authorization. An investment adviser representative may decide, without discretionary authority, the time at which to execute a trade. A)II and IV. B)I and IV. C)I and III. D)II and III.
Discretionary accounts must be reviewed frequently by the designated supervisory person, and an investment adviser representative may decide both the time and price at which to execute a trade without discretionary authority. Only if he is to decide action (whether to buy or sell), asset (what to buy or sell), or amount (how much to buy or sell) is discretionary authority required. Reference: 1.6.2.1.5 in the License Exam Manual
The James Henry Company (JHC), an SEC-registered securities broker-dealer with offices in Chicago and Los Angeles, limits its clientele to banks and trust companies. JHC makes a sale of US government securities to the Wall Street Bank located in New York City. Which of the following statements is (are) TRUE under the Uniform Securities Act? The security itself is exempt from registration. The transaction is exempt. The broker-dealer is not required to be registered in the state of New York. A)I only B)I, II and III C)II only D)I and II
The sale involves a U.S. government security, which is exempt from the registration requirements under the act. The transaction itself is also exempt because it involves a sale to a financial institution. Remember, in an exempt transaction, the security subject of the transaction need not be registered with the state in which the transaction takes place. In this example, the security was already exempt, but that does not diminish the fact that the transaction is exempt. The fact that the firm limits its clientele to financial institutions, such as banks, and that the broker-dealer has no office in New York means that, under the Uniform Securities Act, the firm is not considered a broker-dealer in that state. Therefore, the broker-dealer is not required to be registered in the state of New York. Reference: 2.8 in the License Exam Manual
An agent in Illinois, Missouri, and Iowa has a client move from Chicago to Detroit on July 1, 2014. On September 1 of that year, he buys 100 shares of a nonexempt security in a nonexempt transaction. On August 1, 2015, the client discovered that the agent's firm never licensed him in Michigan and, therefore, he is subject to civil liability to the purchaser. The statute of limitations for this sale runs out A)September 1, 2016 B)August 1, 2018 C)August 1, 2017 D)September 1, 2017
The statute of limitations for civil liability is the earlier of 3 years after the date of the sale, or 2 years after discovery of the violation. In this case, the earliest date is 2 years after the discovery date of August 1, 2015. Reference: 2.15.1.1 in the License Exam Manual
